Friday, 6 October 2017

Turbulent Times for the Airline Industry

Today’s post aims to present somewhat of a round-up of a
number of pieces of news coming from the Airline industry in recent weeks (and
months) because, recently in particular, the divergence between those in the
industry doing well and those that are not seems to be growing at a particularly
rapid rate. Recently we looked at the trade battle that is developing between Boeing
and Bombardier, but in this post the focus will be on the recent collapse
of Monarch, Air Berlin, and the troubles at Ryanair, although it will be
discussed that not all airlines are feeling the heat in this marketplace, with
certain players making significant moves to take advantage of their competitors’
downfall or change in strategy.

Firstly, the two stand-out stories from the airline industry
are worth analysing because the effect that they are having will be felt for
some time. In August of this year, Air Berlin filed
for bankruptcy after its leading shareholder, Etihad Airways, withdrew
financial support for what was then Germany’s second-largest airline. This was
Etihad’s second withdrawal from the European airline market in the space of a
year, leaving the Italian airline Alitalia with no alternative but to file
for bankruptcy as well. With regards to Air Berlin, it is being reported
today that 1,400 of their employees, those who have been retained as the
airline is carved up amongst its competitors, are being threatened
with dismissal, with all of the carrier’s ground staff being relieved of
their posts by the end of this month. As for Alitalia, the carrier is still
being carved up, although the rumoured
takeover approach from Ryanair last month may be some way off given Ryanair’s
current issues, which we will get to shortly. However, for some, the fall of
these regional carriers is a consequence of overcapacity, and their failures
offer an opportunity to reduce the negative externalities that result from the
fragmented European model, although the proponent of this view is the person
who will likely benefit the most – Lufthansa CFO, Ulrik Svensson, stated that ‘all
forms of consolidation are good’. If Svensson’s analysis is correct, that ‘current
developments in Europe are also a positive sign’, then the recent failure of
Monarch airlines will only embolden his claim.

Monarch Airlines, a company which has been providing air
travel since the late 1960s, collapsed
dramatically earlier this month, leaving thousands of passengers stranded abroad.
It has been suggested that the Government, along with the Civil Aviation
Authority, had to return over 11,000
stranded passengers, although other sources suggest that the combined total
was more like 23,000
at a cost of £60
million – the move is being labelled as the U.K.’s ‘biggest
peacetime repatriation’. It should come as no surprise then that there is a
lot of anger surrounding this collapse, with many questioning why the British
Government did not ‘prop
up’ the airline like the German and Italian Governments have done with Air
Berlin and Alitalia (which continue to fly on ever-reducing schedules).
However, the business reality is that Monarch was failing for quite some time,
and the impact of Brexit and the impact of terrorism upon tourism played
crucial parts in the demise of this near 50-year old airline. The consolidation
that Svensson mentioned is going ahead at a rapid pace, with larger carriers
enveloping the assets of these failing airlines, airlines which have been
argued were primed for failure and may, according to best estimates, be the
only ones
to suffer that fate. This is because other airlines are better protected
against the variances within the tourism and energy sectors, although that does
not tell the full story, with one established member of Europe’s airline
fraternity suffering from major internal issues which are affecting both their operational
standards and their PR profile.

Ryanair, operating since 1984, has risen through the
industry so that it now stands as Europe’s largest
carrier, carrying over 116 million passengers every year. However, Ryanair
has been making the headlines recently because of the recent spate of cancellations
that resulted from the firm ‘messing up’ with the
planning of their pilot’s holidays. According to reports, the firm could face a
£18 million compensation bill which will likely grow seems as the airline ‘plans to cancel 40-50 flights
every day for the next six weeks’. The disruption, however, has brought to
light a number of problems within the firm between it and its pilots, with one
pilot describing the company as being run like a ‘communist regime’. In
order to attempt to soothe these concerns, supposedly
beleaguered boss Michael O’Leary has recently written to pilots suggesting
that the firm will increase
their pay beyond that of their rivals, and also offer better job security,
apparently to no avail. What effect that this current crisis, of sorts, may
have upon the alleged deal for Alitalia will be interesting to monitor, but it
is also worth noting that not all of the airline industry are suffering.

At one end the very
smallest of firms are doing very well in and around Europe, whilst EasyJet
today announced that its full-year profits will meet
or exceed forecasts, although this was tempered with the caveat of the effect
of the Brexit-induced collapsing of the Pound. Norwegian Airlines, who recently
launched their new long-haul services from London, flying to new destinations
like Singapore
and New York for a fraction of their competitors’ prices. Also, there are
new entrants to the business at the top table, with new,
more economical jets being commissioned for the larger airlines like
British Airways. So, whilst the airline industry is experiencing mixed
fortunes, the effects may be significant, depending upon one’s perception.

Whilst ‘consolidation’ helps the larger market players face less
uncertainty within an already crowded marketplace like Europe, the reality
is that less competition in this particular sector will usually result in increased
prices for consumers, with the more consolidated American sector proving
that correlation
in recent times. However, whilst the prices for consumers are important, the
working conditions of staff in a more restricted marketplace are of more
concern. The treatment of Air Berlin staff is an issue, irrespective of the
financial position of their employer, but Ryanair’s treatment of its pilots
raises serious questions about the employment standards in an industry that the
public put their safety in the hands of every day. The development of the
stand-off between Ryanair and its pilots will be important to monitor, because
the result is that Europe’s largest carrier is also the host of legions of disaffected,
overworked and underpaid pilots and staff, which has a number of massive
ramifications. As the industry heads towards ‘consolidation’, the usual effects
of ‘consolidation’ need to be remembered, because it is usually the public that
pays the price.

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